Income inequality now equals debt inequality

There aren’t a lot of surprises in this CNN/Money article about debt. On the surface, it shows that wealthy people borrow less money than non-wealthy people. I don’t think that’s news to many people. I also don’t think it’s news that wealthy people’s incomes are growing faster than non-wealthy people.

What I found very surprising, though, is that the non-wealthy used to borrow less money than the wealthy did.

Yes, you read that right. In 1983, wealthy people borrowed 76 cents for every dollar they earned. In 2007, they borrowed 64 cents for every dollar earned.

In 1983, non-wealthy people borrowed 62 cents for every dollar they earned. In 2007, they borrowed $1.48 for every dollar they earn.

The trend for the wealthy doesn’t hurt much. It certainly doesn’t hurt them.

The trend for the non-wealthy–which this article defines as those who earn less than $160,000 per year–is unhealthy. If you borrow more money than you earn, you’ll never dig yourself out of debt.

The article sites two reasons. Some people are borrowing out of necessity: for education, or even for basic living expenses. That’s not good, but sometimes it’s unavoidable too. I managed to escape college without any student loan debt, but I know I’m unusual in that regard. And during those times I was in between jobs, my house and car payments kept going even though my paychecks weren’t.

The other reason is lifestyle related. That’s not good and it’s unavoidable. My wife and I discussed that slippery slope earlier this week. You see a box sitting at your neighbor’s curb on garbage day, or you see a delivery truck, and you see your neighbor just got something nice. So then you get something to match.

It’s bad enough if it stops there, but sometimes it doesn’t. Next month, when someone else gets something nice, if you justify getting one of those too by saying you got something nice last month and nothing bad happened, then you’re on your way to getting into trouble.

That’s just one way to get into trouble. Another is to spend like you expect a raise. I very nearly got myself into trouble that way. In 2002 I bought a house. The payments on it were going to be a stretch for me, and I knew it, but I was expecting a raise. But the raise didn’t come in 2003. It didn’t come in 2004 either. It finally did come in 2005, but I had to change jobs completely in order to get it–new employer, new everything. It wasn’t voluntary, but in the end it was for the best. For me at least.

So don’t buy the new house or the new car until you actually have the salary that can handle it.

I heard someone on the radio this morning talking about entitlement. Entitlement is a bad, bad word. I have coworkers who drive newer and nicer cars than I drive. They have bigger TVs than me, and they have more of them, too.

But what am I accomplishing if I dwell on that? Do I need to impress them? I’m good at my job, so shouldn’t that be enough to impress them? Am I entitled to comparable stuff to theirs? After all, we all make about the same salary, more or less.

Here’s a better question: Why does it matter? And besides that, I’m still paying for diapers and they aren’t. But I’d much rather have the two sons responsible for all those dirty diapers.

There’s more to life than what we drive to work and what’s visible from the curb. And continually borrowing money to make sure we don’t have the least impressive view from the curb is self-destructive.

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